Why Climate Risk Is an Underwriting Variable, Not a Moral Debate

This is Climate-Ready Real Estate Investing, the intelligence briefing for stakeholders in the nearly $400,000,000,000,000 global real estate market, the world's largest asset class. The goal is to provide you with the intelligent signals to be profitable today while ensuring we will have a tomorrow. Listen, then implement to do good things and make money. I'm your host, Jamie Wolf. Welcome to Climate Ready Real Estate Investing.

Each week, in addition to guest expert interviews, our audience receives three short briefs focused on market intelligence like this one, strategy and underwriting, as well as narratives of current events with future implications. The theme underlying climate ready real estate investing is a deep concern for the well-being and viability of our planet today and tomorrow and a desire to explore how best to support this nearly $400,000,000,000,000 industry in making both profitable and forward thinking big picture decisions, borrowing from the Hippocratic Oath to first do no harm. This month, we're reframing climate change as a matter of market structure, not ideology. With that as context, for decades, real estate underwriting treated climate risk the way it treated background noise, as something happening in the room but not reflected on spreadsheets. That attitude is no longer holding, and the institutions sitting up and taking notice are not climate activists.

They are insurance carriers, rating agencies, sovereign wealth funds, and the largest mortgage buyers in the country. Therefore, when you begin to excel at recognizing climate risk as a quantifiable variable, you will increase your confidence in your own deal risk assessment and decision making. So what's the market signal? Effectively, it's math or, more specifically, underwriting. In 2023, U.

Home insurance underwriting losses reached $15,200,000,000, the worst result this century according to AM Best. That number drove a wave of carrier behavior we are still living through. State Farm stopped writing new homeowner policies in California as did Allstate. Meanwhile, Farmers Insurance exited Florida entirely. And these are not boutique players.

These are the carriers that together underwrite a meaningful share of The US housing stock. Premiums are climbing in step. The national average cost of homeowners insurance rose by roughly eight to 12% in 2025, reaching an overall average of about 2,948 to 3,520 per year. This spike has largely been driven by severe weather events, such as convective storms and wildfires and by inflated costs for building materials according to S and P Global Market Intelligence, with rates varying by state and methodology. In high exposure zip codes, double digit annual increases are now ordinary, not exceptional.

Minnesota, Colorado, Iowa, Nebraska, and Oklahoma saw premiums surge by 20 to 34% due to hail, tornadoes, and wildfires. Florida continues to fear the worst with statewide averages ranging anywhere from 8,000 to over 15,000 per year. As challenging as it is for any given homeowner, insurance markets exist for one purpose. They price risk. So if the institutions whose primary corporate existence is to calculate the cost of risk are repricing climate exposure aggressively and quickly, then climate risk has stopped being an ideology.

It is now front and center as math. And when the math changes, so does underwriting. That is the signal we're tracking today. Let's look at a case study. A coastal multifamily property with 80 units in the Mid Atlantic region, acquired in 2020 for $15,000,000 At acquisition, the insurance cost a 180,000 annually or about 1.2% of the price, as was expected.

Today, just six years later, insuring that same building cost $450,000, two and a half times the original premium. Nothing about the building has changed. There are no new units. There is no structural deficiency. There have been no claims.

The asset is identical. The underwriting is not. Now let's run the math the way we, as investors, actually feel it. On 80 units, a $270,000 premium increase is roughly $280 per unit per month of NOI evaporation before you raise rents, renew leases, or refinance. If the property was underwritten at a five and a half percent cap rate, then $270,000 of lost net operating income is roughly $4,900,000 of value erosion at the same cap rate on a $15,000,000 deal.

That is not a rounding error. Depending on your deal's leverage, that delta may represent a significant portion of, or in some structures, more than your equity stack. So why is this happening? Three structural forces are now transmitting climate risk directly into every deal. First, insurance is repricing fast.

Carriers are pricing wildfire, flood, wind, and heat exposure at the parcel level, not at the state level. It's now granular, geospatial, and updated almost in real time. Second, financing exposure is being examined rigorously. Lenders are now overlaying flood maps, wildfire risk scores, and long term collateral durability into credit decisions. Fannie Mae and Freddie Mac, who together support roughly 70% of US mortgage originations according to widely cited industry benchmarks, are actively researching climate risk models.

When the agencies move, the entire mortgage market moves. Third, there is appreciable migration pressure. Climate exposure is changing where people choose to live, where they can afford to live, and where they avoid. First Street Foundation's peer reviewed research found that over 3,200,000 Americans moved from high flood risk neighborhoods between 02/2020, creating what researchers called, quote, climate abandonment areas, localized population declines concentrated in the highest risk census blocks. That research is the documented foundation.

The signal it points to for real estate capital is this: Where insurance becomes unreliable, demographic durability follows. Real estate markets move slowly until they don't. Insurance markets move first. Property markets follow. Here is the part that matters for capital.

If climate risk is underpriced in your model, the asset can look profitable on paper while it is structurally deteriorating in real life. This is before other market forces, such as inflation, a stagnant economy, or rising material costs are taken into account. The cash flow you projected in year one was real. The cash flow you assumed in year seven may not be. Let's walk through what this means for you, because this brief is built for stakeholders across the value chain.

For investors and operators, rising premiums directly compress NOI. And once NOI compresses, two things happen simultaneously. Cap rates may widen on exit because the buyer pool is pricing in the same risk you are now experiencing. And liquidity shrinks because if the next buyer cannot secure affordable insurance, they cannot get debt. No insurance, no loan.

No loan, no buyer. Durable returns require durable insurability. You will hear me say that often. For developers, future building codes and insurance requirements are already shaping demand on projects breaking ground today. Designing for yesterday's climate is the fastest way to build tomorrow's stranded asset.

The International Code Council and several state level code bodies are actively updating wildfire and wind standards, and insurers are watching those updates more closely than are most developers. For supply chain leaders, demand is shifting toward fire resistant siding, flood resistant assemblies, impact rated glazing, and high performance insulation. Manufacturers that can document insurer recognized resilience credits will have a pricing advantage over competitors that cannot. That is a sales argument, not an environmental argument. For fintech and prop tech founders, climate adjusted data will integrate into lending models, appraisal platforms, and underwriting software, the same way credit scores integrated into consumer finance in the nineteen nineties.

The companies building that infrastructure right now are building tomorrow's pricing layer. For policy professionals, you know that zoning infrastructure spending and resilience incentives directly influence whether a community remains able to attract capital. A municipality that invests in stormwater capacity or hardened utility lines is, in effect, creating an insurance subsidy that flows straight into local property values. At its core, climate adjusted underwriting protects four things: cash flow durability, refinancing optionality, exit liquidity, and portfolio defensibility. Ignoring it risks sudden repricing, the kind that happens at renewal, whether you are ready or not.

Understanding it creates your edge. Here's what I think you should watch for next, the normalization of climate adjusted underwriting. Within twenty four to thirty six months, I expect a climate risk line item to be standard inside institutional deal models, the same way property tax and insurance are standard line items today. That line item will likely include four things. First, a ten to twenty year insurance projection, not just a year one quote.

Next, a carrier withdrawal probability. The odds your insurer simply leaves the market. Third, capital reserves earmarked for resilience retrofits over the hold period. And finally, an assessment of infrastructure resilience in the surrounding community. Because assets do not perform in they perform inside communities.

Community stability is functioning as an economic moat right now. Capital is already reflecting it. Brookings has documented post pandemic population recovery in cities like Indianapolis, Columbus and Minneapolis. Metros with lower acute climate hazard profiles and stronger water security than their sun belt alternatives. The Urban Land Institute, ULI's research partnership with Heitman has flagged climate migration as a real estate underwriting variable that investors need to integrate.

The convergence of population durability and capital flow toward moderate risk, water secure metros is a trend worth tracking, even as the academic literature is careful to note that climate driven relocation is still emerging, not yet dominant. Historically, capital chased appreciation. In the next cycle, capital may chase durability. That is not a moral statement. That is a returns statement.

A property you can still insure in year ten is a property you can still finance in year ten, and a property you can still finance is a property you can still sell. So here's the takeaway for today. The cause or existence of climate risk is neither a moral nor a philosophical debate. It is an underwriting variable, and underwriting variables determine asset pricing, financing availability, liquidity, and long term returns. The investors, developers, lenders, manufacturers, and policy professionals who understand how climate risk is transmitted through insurance, lending, policy, materials cost, and migration will gain a structural advantage over those who don't.

Because markets do not reprice ideology, they reprice risk, and risk isn't living in the far off future it's already here. I ask the same question at the end of each brief because while the answer changes depending on the specific context, that twenty twenty hindsight is more valuable today. If you are underwriting a deal today or supplying materials, writing policy, designing technology, or allocating capital with the benefit of already having seen ten years into the future, what would you do differently today? To help you answer that, I want to point you to a tool built specifically for market intelligence briefs like this one: the Climate Ready Deal Framework CRDF, signal tracker. With it, you can log climate signals as they emerge in your market, translate them into financial impact, and score them so you know which signals are noise and which ones are reshaping your pricing before you can't get out from under the deal.

Subscribers get it in their inbox. If you are not yet on the list, head to www.climatereadyre.com and enter your email. That wraps it up for today. The next brief is titled Hidden Costs Investors Ignore When Buying Property. Be sure to subscribe to Climate Ready Real Estate Investing to receive free downloads for our market intelligence and strategy and underwriting briefs.

Listen to the podcast and find us on Twitter and LinkedIn. If you'd like to be a guest on the show, you can register at climatereadyre.com, the place where resilient returns and resilient communities meet. Until next time, I'm your host, Jamie Wolf. Be good and do better for today, tomorrow, for you, and for all. Know your signals and be climate ready.

This has been the intelligence briefing on Climate Ready Real Estate Investing, where we explore climate through a financial lens to achieve resilient returns and resilient communities. Find us on LinkedIn and Twitter. To get the Climate Ready Deal Framework to help you reevaluate your deals, go to climatereadyre.com, enter your email address, then check your inbox. See you next time. Climate Ready Real Estate Investing is an independent intelligence briefing.

We synthesize publicly available research, industry reporting, and data, sometimes with the help of AI enabled analytical tools, into commentary and analysis on the trends shaping real estate, climate risk, and the long term durability of communities. Nothing in this program is investment, financial, legal, tax, or other professional advice. Always do your own due diligence and consult qualified professionals before making decisions.